Dishonesty in our Media concerning Economics: Charles Lane is Exhibit A

Charles Lane's "editorial" entitled The Folly of the US Housing Bubble is a textbook example of the problem with our mainstream media. Let us not waste more time than necessary on this deficient apologia. I will cut directly to Lane's conclusion:

Foote, Gerardi and Willen admit that economists are no closer to explaining the U.S. house mania than they are to understanding the tulip mania in Holland almost four centuries ago. 

Foote, Gerardi, Willen, and Lane have some homework to do (start with this and this). Bill Black explains the "housing mania" over and over again. First of all, it was a credit bubble. The "housing mania" was a product of that credit bubble. The credit bubble was the product of fraud. The fraud was the product of perverse incentives:

On how perverse incentives encourage fraud: Perverse incentives produce criminogenic environments that encourage fraud. When people are able to steal a lot of money, with no threat of imprisonment, nor having to live in disgrace, an environment conducive to fraud is established.  Establishing such an environment in practice requires the 3 D's: Deregultation, Desupervision, and de facto Decriminalization. Deregulation: you get rid of the rules.  Desupervision: any rules that remain, you do not enforce.  Decriminalisation: even if you sometimes sue the perpetrators and get a fine, you do not put them in prison.  

On the ideal perverse incentives for accounting fraud: Accounting fraud thrives most with really high pay based on short-term reported income with no way to claw it back -even when it proves to be a lie.  Also helpful is for assets to not have a readily verifiable market-value; this makes it easy to inflate the asset prices and easy to hide real losses.  For a true epidemic of fraud, it is also helpful to have easy entry into the industry.

Bill Black's Recipe for Bankers to become Billionaires:  1. Grow massively, 2. By making very poor quality loans at high rates of interest, 3. Use extreme leverage (high corporate debt), and 4. Set aside virtually no loss reserves for the massive losses that will be coming. If you do these four things, you are mathematically guaranteed to report record short-term income. Akerlof and Romer referred to it as a sure thing - it is guaranteed.

What the Recipe for Fraud will Guarantee: 1. The bank will report record profits (fictional profits), 2. The CEO will promptly become wealthy, and 3. Down the road, the bank will suffer catastrophic losses. As a bonus, if many banks do this simultaneously, a bubble will be hyperinflated.

Mr. Lane, since you write extensively about the intersection of economics, law, and policy, you have certainly come across Bill Black's work - and, hopefully, you have read Akerlof and Romer. It is dishonest to claim that economists are unable to explain bubble behavior without even mentioning that there is an entire body of work that explains the bubbles, the behavior, and what can be done to prevent them from happening in the future.